Market Outlook March 21, 2011

The economic outlook has become a little less certain, with the major problems experienced in Japan. Inflation is lower and bond yields are lower. At the same time, the stock market went through a correction that it seems to have snapped out of over the last day or two. A 4% correction doesn’t seem like much, given that markets will often correct 5% – 10%. Already, 2.5% has been reversed so that the market is only 1.5% below its recent peak. Volatility (VIX) had been at 30 and has since dropped back to 20. While it’s too soon to say, it feels like the recent volatility is behind us.

To provide some perspective, the value of the TSX is now at a level it first reached in early February. For the two years prior, it was consistently lower. The market was doing the same thing, arriving at 13,750 from below, in May 2007. It then leveled off before crashing in August 2008. This time, investors are less euphoric and more nervous. We may have another summer like last year, where the market remained relatively low for a number of months, but it seems unlikely that we’ll experience a rapid drop like 2008.

Stocks and bonds both had a positive week. Stocks still continue to have better momentum than bonds, implying that it’s not time to cash out of the stock market. However, expectations are catching up with earnings, so we’re seeing fewer surprises in earnings announcements. The easy money has been made, and it will take more skill (or luck) to pick profitable stocks moving forward.